The White House, as well as Senators from both sides of the bipartisan fence within the U.S. Senate Banking Committee, have come together to create a draft legislation to makes major changes to the mortgage market while allowing borrowers continued access to long term, fixed-rate loans.
While specific details of the bill are being kept under wraps, Senate Banking Committee Chairman Tim Johnson, Democrat, and Ranking Member Senator Mike Crapo, Republican, made the announcement this past Tuesday of a draft bill and let slip some bullet points. The Obama Administration was said to be consulted in the drafting of the legislation.
This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing.
Said Tim Johnson.
This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital.
Crapo said in a statement.
The most considerable of the changes planned includes the dismantling of Fannie Mae(FNMA) and Freddie Mac(FMCC), and the creation of a new Federal Mortgage Insurance Corporation(FMIC). The two federal mortgage institutions are responsible for owning and covering approximately 60% of all US home loans. They buy loans and package them into various securities to sell to investors.
According to an article from Reuters,
Their central role in housing finance led the government to bail them out to the tune of $187.5 billion when they ran into trouble in the midst of the financial crisis of 2007-2009. Lawmakers from both parties want to revamp the $10 trillion mortgage market to make it less likely taxpayers will ever be put on the hook again.
The new FMIC would be created to insure tax payers protection against another potential catastrophic market collapse in the housing industry. Any institution or individual investors within the market would pay fees to the FMIC which would cover 90% of the risk with bonds created by the Government that would only go into effect if losses extended beyond 10%.
The other 10% of risk would be sold and fall to the market itself, John Sim of JP Morgan was quoted by Yahoo Finance saying,
The new system will be selling off the bottom 10% of the risk, whereas the current system merely guarantees it with a nominal fee.
Outspoken Senators Elizabeth Warren and Sherrod Brown, both of whom sit on the Committee, have said they refuse to support the bill unless there are affordable loans measured in for buyers with added plans to cover low-income housing as well. The Democratic lead Committee has to come to an agreement before this bill can hit the Senate floor.
The current new bill includes a measure saying borrowers would be responsible for making down payments of at least 5% of any monies loaned, and that Fannie Mae and Freddie Mac won't be taken apart until the new system is completely in place. That is, assuming, that this version of the bill still exists in current form by the time it hits the House or Senate.
So, just when it was thought safe to get back into the housing market water as Fannie Mae and Freddie Mac had finally become profitable, since the announcement shares of Fannie Mae and Freddie Mac have tumbled 40% to almost 30% respectively.
Based on the multi-trillion dollar per year intake of this industry before the housing crisis in 2007, investors would not be averse to spending massive amounts, and there's long been a call to action to put the market back into the hands of investors and away from the Federal Government, but it's likely that market collapses and failures of the past will increase tensions across the entire US economy as this issue moves forward.
A quote taken from Sys-con Media by Mike Calhoun, president of the Center for Responsible Lending, has him saying,
We appreciate Senators Johnson and Crapo's attention to this critically important issue. The mortgage market is a $10 trillion industry and any changes to it will resonate through the entire economy. This is why any change must be considered carefully."
Calhoun continues here, stating
Overhaul of the housing finance system must ensure access to affordable and responsible mortgage credit for all consumers. If legislation fixes what was broken and builds on what works, we can create a housing finance system that will support economic growth and provide loans to creditworthy families in good times as well as bad. We will be looking closely at the Johnson-Crapo proposal to see how it measures up against these goals.
As will the myriad concerned lenders, investors, borrowers, politicians, and all other players involved and to be effected in the various aspects of the current housing market by this potential legislation.